Fitch Rates American Airlines Group Inc. Notes 'B /RR4'
American intends to issue at least \$500 million in senior unsecured notes. The proceeds will be used for general corporate purposes. The notes will feature a five-year tenor and will be fully and unconditionally guaranteed by American Airlines, Inc., US Airways Group, Inc. and US Airways, Inc. The notes will be rank pari passu with all current and future senior unsecured indebtedness of the issuer and all guarantors.
KEY RATING DRIVERS
The 'B+/RR4' rating is driven by Fitch's recovery analysis, which reflects recovery expectations under a scenario in which distressed enterprise value is allocated to the various debt classes. Fitch's recovery analysis incorporates a 'going concern' scenario, reflecting the likelihood that the company would restructure rather than liquidate in a potential future bankruptcy. Fitch notes that although the recovery model indicates the potential for above-average recovery prospects for American's unsecured debt, recovery percentages are highly sensitive to model inputs due to the heavy weighting of the capital structure towards secured debt. Fitch notes that unsecured recoveries have varied widely in previous airline bankruptcies as pension, rejected lease, and labor claims can dilute amounts available to unsecured creditors. An 'RR4' rating reflects the expectation that unsecured noteholders would likely experience average recovery.
Fitch currently rates American Airlines Group Inc. 'B+' with a Stable Outlook.
The most recent full ratings review was completed in December 2014. Fitch views American's credit profile as improving, and a Positive Outlook or rating action is possible in the near- to intermediate-term if the merger integration continues smoothly and if fuel prices remain low. The improving credit profile is evidenced by the company's strong financial performance since its emergence from bankruptcy in December 2013 and by the significant progress in integrating the former US Airways and American Airlines operations. American's ratings are also supported by its sizeable liquidity balance. Cash at year end stood at \$6.6 billion (excluding cash held in Venezuela). American also maintains an undrawn \$1.4 billion revolver.
Most important, the company stands to gain a substantial benefit from lower fuel costs in 2015. American's policy to remain unhedged allows it to fully benefit from the steep decline in jet fuel seen in recent months, whereas the cash savings for other operators are partially offset by hedge losses. Fitch expects lower fuel costs to lead to potentially significant improvement in the company's credit metrics over the next year.
Primary rating concerns include risks related to the on-going merger integration process, a significant debt balance, heavy upcoming capital requirements, and the company's shareholder-directed cash deployments. Other rating concerns include risks inherent to the airline industry, including cyclicality, intense competition, and exposure to exogenous shocks (i.e. war, terrorism, epidemics, etc.).
Key Assumptions
--Continued revenue and profitability improvement based on a stable demand environment and lower fuel prices;
--Further margin expansion based on expected merger-related synergies;
--Pressured free cash flow (FCF) and future debt issuance driven by heavy capital spending.
RATING SENSITIVITIES
Positive::
--Adjusted leverage moving towards 4x;
--FCF to improve from current negative levels;
--Further evidence that the merger integration is progressing smoothly, e.g. completion of the move to a single reservations system.
A negative rating action is not anticipated at this time. However, Fitch could consider revising the ratings downward if the company were to experience significant/sustained integration-related difficulties. The ratings could also be pressured by an unexpected demand shock that materially affects operating results.
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